U.S. Home Affordability Improves to a Two-Year Low in Q1 2015

RealtyTrac and Clear Capital released a joint report showing that buying a home was at the most affordable level in two years in the first quarter of 2015 despite the average U.S. home price increasing at more than twice the pace of the average weekly wage nationwide over the past year. Wage growth did outpace home price growth in one-third of local markets, including counties in Chicago, Southern California, Brooklyn and Washington, D.C.

For the report RealtyTrac analyzed recently released Q1 2015 average weekly wage data from the Bureau of Labor Statistics and average prices for single family homes and condos derived from publicly recorded sales deed data collected by RealtyTrac in 582 U.S. counties with sufficient home price data. Average interest rates on a 30-year fixed rate mortgage came from the Freddie Mac Primary Mortgage Market Survey. Clear Capital analyzed data from its Home Data Index to determine counties at highest risk and lowest risk based on affordability and potential for price growth (available upon request).

“Affordability is key metric in determining the overall health of a housing market as it largely represents the barrier to entry for first time homebuyers. First time buyers represent the ‘fuel’ for which overall market growth is determined due to the fact that this demand segment starts a chain reaction that allows existing home owners to sell and move-up thereby churning the housing market and price growth,” said Alex Villacorta, Ph.D., vice president of research and analytics at Clear Capital.

“The results of this analysis show the significant variability in affordability and home price trends facing these new buyers across the country. Of particular note is the alarming affordability barrier in virtually all markets in California and metro New York. As the eye-popping price growth continues to moderate there is a real risk that a slowing or even declining market combined with out-of-reach affordability will disenfranchise new buyers — an ominous sign to be sure. Conversely, favorable buying environments in Midwest markets like Detroit are a reflection of the long runway for growth still present in major metros.”

Average home price appreciation outpaced average wage growth between the first quarter of 2014 and the first quarter of 2015 in 397 out of 582 (68 percent) U.S. counties analyzed for the report. But during the same time period, the average interest rate on a 30-year fixed rate mortgage dropped 57 basis points (13 percent), from 4.34 percent in the first quarter of 2014 to 3.77 percent in the first quarter of 2015. The drop in interest rates — along with wage growth outpacing home price appreciation in 32 percent of counties — meant buying a home in the first quarter of 2015 required a smaller share of the average wage compared to a year ago in 339 of the 582 counties (58 percent).

“Although home prices continue to outpace wage growth in the majority of local markets, this analysis somewhat surprisingly shows that affordability is actually improving in most markets thanks to falling interest rates and slowing home price growth, which is allowing wage growth to catch up in some markets,” said Daren Blomquist, vice president at RealtyTrac. “At the national level, buying an average-priced home in the first quarter of 2015 was the most affordable it’s been in two years and nearly twice as affordable as it was in the second quarter of 2006 — when affordability was its worst in the past 10 years. At the local level we’re seeing several bellwether markets where wage growth matched or even outpaced home price growth over the past year.”

Counties where wage growth outpaced home price growth

Major markets where wage growth outpaced home price growth in the first quarter — counter to the national trend — included Cook County, Illinois in the Chicago metro area; Orange County, California in the Los Angeles metro area; Brooklyn, New York; Fairfax County, Virginia in the Washington, D.C., metro area; and Riverside County in Southern California, where the average weekly wage in the first quarter was up 10 percent from a year ago, double the 5 percent growth in average home prices during the same time period.

Buying a home 48 percent more affordable than during 2006 housing bubble

Assuming a 3 percent down payment, monthly payments on an average-priced U.S. home — including property taxes, home insurance and private mortgage insurance (PMI) — required 36.5 percent of the average wage nationwide in the first quarter of 2015, down from 37.6 percent in the previous quarter and down from 37.4 percent in the first quarter of 2014 to the most affordable level since the first quarter of 2013, when affordability was 33.5 percent.

Buying a home nationwide was at the most affordable level in the last 10 years in the first quarter of 2012, when monthly house payments required 32.0 percent of average wages, while buying a home nationwide was at the least affordable level in the last 10 years in the second quarter of 2006, when monthly house payments required 70.7 percent of average wages.
Home price growth outpacing wage growth 3 to 1 during housing recovery

Since bottoming out in the first quarter of 2012, the average U.S. home price has risen 24 percent while the average weekly wage nationwide has risen 7 percent during the same time period and the average interest rate on a 30-year fixed rate mortgage has dropped 5 percent.

The average U.S. home price is still 12 percent below where it was in the second quarter of 2006, when buying a home was at the least affordable level in the last 10 years. Meanwhile the average wage nationwide has risen 34 percent and the average interest rate on a 30-year fixed rate mortgage has dropped 44 percent during that same time period, resulting in a 48 percent improvement in affordability.

Among all 582 counties analyzed in the report, only 20 (3 percent) exceeded their 10-year affordability averages in the first quarter of 2015, including counties in the Nashville, Lansing, Michigan, Cincinnati, Memphis, Washington, D.C., and Atlanta metro areas.

If interest rates were rise 25 basis points in the first quarter of 2016 from what they were in the first quarter of 2015 (to 4.02 percent) and home prices and wages grow at the same annual pace they did in Q1 2015, then 76 of the 582 counties (13 percent) would exceed their historic affordability averages.

If interest rates were rise 50 basis points in the first quarter of 2016 from what they were in the first quarter of 2015 (to 4.27 percent) and home prices and wages grow at the same annual pace they did in Q1 2015, then 92 of the 582 counties (16 percent) would exceed their historic affordability averages.

If interest rates were rise a full percentage point in the first quarter of 2016 from what they were in the first quarter of 2015 (to 4.77 percent) and home prices and wages grow at the same annual pace they did in Q1 2015, then 131 of the 582 counties (23 percent) would exceed their historic affordability averages.

Among all 582 counties analyzed in the report, the average percent of wages to buy a home in the first quarter of 2015 was 35.5 percent, but the affordability ratio was above the debt-to-income threshold of 43 percent required for a qualified mortgage (QM) in 141 of the 582 counties (24 percent).

If interest rates were rise 25 basis points in the first quarter of 2016 from what they were in the first quarter of 2015 (to 4.02 percent) and home prices and wages grow at the same annual pace they did in Q1 2015, then 177 of the 582 counties (30 percent) would exceed their historic affordability averages.

If interest rates were rise 50 basis points in the first quarter of 2016 from what they were in the first quarter of 2015 (to 4.27 percent) and home prices and wages grow at the same annual pace they did in Q1 2015, then 183 of the 582 counties (31 percent) would exceed their historic affordability averages.

If interest rates were rise a full percentage point in the first quarter of 2016 from what they were in the first quarter of 2015 (to 4.77 percent) and home prices and wages grow at the same annual pace they did in Q1 2015, then 203 of the 582 counties (35 percent) would exceed their historic affordability averages.

The least affordable counties in the first quarter were led by Eagle County, Colorado, where 138.5 percent of the average wage was needed to make monthly payments on an average priced home. Other counties in the top five least affordable for buying a home in the first quarter of 2015 were Kings County (Brooklyn), New York (126.3 percent), Marin County, California in the San Francisco metro area (119.3 percent), Santa Cruz County, California (109.0 percent), and Maui County, Hawaii (99.2 percent). Of the top five least affordable markets, only Eagle County had exceeded its historic affordability average in the first quarter.

Other counties among the top 20 least affordable in the first quarter included counties in the Key West, Florida, San Francisco, San Jose, Washington, D.C., Los Angeles and Denver metro areas.

“There is no question that when interest rates start to rise it will impact home sales, but I expect wage growth to offset any pronounced negative effects in the Seattle market,” said Matthew Gardner, chief economist at Windermere Real Estate, covering the Seattle market. “That being said, over the next year, I predict interest rates will rise to 5 percent, which in conjunction with the strong growth in home prices, could make affordability an even bigger issue than it already is, especially for first time buyers.”

Most affordable housing markets include counties in St. Louis, Chicago, Detroit

The most affordable counties in the first quarter were led by Hamilton County, Florida, where 5.6 percent of the average wage was needed to make monthly payments on an average priced home. Other counties in the top five most affordable were Saint Louis County (8.3 percent), Saint Louis City (9.4 percent), Lake County, Indiana in the greater Chicago metro area (9.5 percent), and Fairfield County, South Carolina in the Columbia metro area (10.3 percent).

“The power of low interest rates and a strong improving economy in South Florida makes this is a historic time to buy real estate in the area,” said Mike Pappas, CEO and president of the Keyes Company covering the South Florida market.

Other counties among the top 20 most affordable in the first quarter included counties in the Detroit, Cleveland, Baltimore and Philadelphia metro areas.

“Affordability should remain strong in the Midwest but the unfortunate byproduct of a possible increase in interest rates may result in the loss of housing demand from millennials and boomerang buyers,” said Michael Mahon, president at HER Realtors, covering the Cincinnati, Dayton and Columbus markets in Ohio. “The combination of slow job creation, and a national gross domestic product below 2 percent means the average consumer is already experiencing a loss in overall purchase power, which limits the ability to effectively save for a down payment on a house.”

About RealtyTrac RealtyTrac is a leading provider of comprehensive U.S. housing and property data, including nationwide parcel-level records for more than 130 million U.S. properties. Detailed data attributes include property characteristics, tax assessor data, sales and mortgage deed records, distressed data, including default, foreclosure and auctions status, and Automated Valuation Models (AVMs). Sourced from RealtyTrac subsidiary Homefacts.com, the company’s proprietary national neighborhood-level database includes more than 50 key local and neighborhood level dynamics for residential properties, providing unrivaled pre-diligence capabilities and a parcel risk database for portfolio analysis. RealtyTrac’s data is widely viewed as the industry standard and, as such, is relied upon by real estate professionals and service providers, marketers and financial institutions, as well as the Federal Reserve, U.S. Treasury Department, HUD, state housing and banking departments, investment funds and tens of millions of consumers.

About Clear Capital Clear Capital (www.clearcapital.com) is the premium provider of data and solutions for residential and commercial real estate asset valuation and collateral risk assessment for large financial services companies. Their products include appraisals, broker price opinions, property condition inspections, value reconciliations, quality assurance services, home data indices and platform solutions. Clear Capital’s combination of progressive technology, high caliber in-house staff, and a well-trained network of more than 40,000 field experts sets a new standard for accurate, up-to-date, and well documented valuation data and assessments. The Company’s customers include the largest U.S. banks, investment firms, and other financial organizations.